The Homa Files

Ken’s Take:

Cuts through all of the rhetoric to the root cause: (1) the government “encouraged” bad loans   (2) the government allowed bundling of loans into MBSs (mortgage backed securities)  (3) the government provided an implied guarantee to the MBS bundles via Fannie and Freddie —GSEs ( government sponsored entities)  (4) the MBS bundles were resold up the financial food chain — separating their risk from their origination (5) the MBSs established a platform for very highly leveraged financial derivatives (e.g. CDOs, default swaps)  (6) when home prices peaked, the derivatives lost value and couldn’t support the associated borrowings, creating — in effect — the mother of all margin calls.

Dems are at the root of the problem, but the GOP isn’t blame free.  The Community Reinvestment Plan was a Dem brainchild, Clinton authorized the bundling of subprime loans, and Frank-Dodd-Reid have stopped regulation of Fannie and Freddie.  But, Bush also pushed for “a culture of (home) ownership” and had a GOP Congress until 2006 that should have been able to force greater regulation on Fannie and Freddie.

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From IBD: “America’s Second Wake-Up Call!”, Oct. 10, 2008

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Do you know the real cause of the out-of-control subprime loan mess that’s creating so much fear and hurting every American?

In 1995, President Clinton mandated new regulations that coerced banks to make significantly more subprime loans to inner-city residents previously viewed as unqualified buyers in high-risk areas. Many subprimes were variable-rate loans made without down payments or documentation of borrowers’ incomes. Banks were rated on how well they complied and faced big fines if they didn’t do what government regulators wanted.

The government’s worst decision was allowing and encouraging banks, for the first time, to bundle these subprime loans in giant packages with prime loans. These packages were then sold to other investors as safe because they were government-sponsored by Fannie Mae and Freddie Mac. The first of these government-encouraged packages came to market in 1997.

For the banks, the loan bundles were profitable because they could be sold quickly and thereby absolve the banks of any risk in the loans they made.

The banks could then use the money to make even more of these lower-quality, government-required loans, and Fannie Mae and Freddie Mac bought them with virtual abandon.

It evolved into a Big Government pyramid scheme . In short, this was yet another well-intended, government-designed and run program that failed miserably and had the usual unintended consequences.

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September 2003: Treasury Secretary John Snow, in testimony to the House Financial Services Committee, recommended that Congress enact legislation to create new agency to regulate and supervise financial activities of housing-related government entities to set prudent and appropriate minimum capital requirements.

Rep. Barney Frank, the committee’s ranking member, strongly disagreed, saying: “Fannie Mae and Freddie Mac are not facing any kind of financial crisis . . . . The more people exaggerate these problems, the more pressure there is on these companies, the less we’ll see in terms of affordable housing.”

• April 2004: Rep. Barney Frank ignored warnings, accusing the administration of creating an “artificial issue.” “People pay their mortgages,” he told a group of mortgage bankers. “I don’t think we are in any remote danger here. This focus on receivership, I think, is intended to create fears that aren’t there.”

• July 2005: Senate Majority Leader Harry Reid rejected legislation on reforming Fannie and Freddie. “While I favor improving oversight by our federal housing regulators to ensure safety and soundness, we cannot pass legislation that would limit Americans from owning homes and harm our economy in the process,” he said.

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Full article:
http://www.ibdeditorials.com/IBDArticles.aspx?id=308530236252361

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This entry was posted on October 13, 2008 at 7:45 am and is filed under Government & Politics, Mortgage Crisis. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.